Friday, 5 October 2012

Shaken and stirred by tax dodge debate

Turned on the radio just
before 7am this morning and immediately heard Monty Norman’s famous James Bond
theme, played to mark fifty years since the film franchise was launched with
the release of Dr No. In a reverse of the way Bond likes his favourite tipple
fixed, I was stirred rather than shaken by the music. But within seconds a
phone call from BBC Radio 5 live, asking me to give a live interview at 7:10,
kick started the adrenaline.

The House of Commons Public
Accounts committee has published a report looking at the contractual arrangements
of people hired by public bodies, notably the BBC, which enables them to pay
less tax. These so-called ‘off payroll’ staff are self-employed service
providing contractors who control their own limited companies. They can avoid
the income tax and national insurance they would pay if engaged by public
sector organisations on the payroll as employees. While such arrangements are
perfectly legal the concern is that these contractors, especially if they work
for just one public body or do so for a prolonged period of time, are merely employees
dressed up as self-employed to cut their tax bill.

The issue surfaced earlier
this year when it was revealed that the head of the Student Loans Company was
employed full-time on this basis, which led MPs on the Commons committee to
inquire into the scale of the practice. HM Treasury has also been undertaking an
investigation and is currently reviewing submissions to a public consultation exercise
which it ran until August.

The perceived avoidance caused
by ‘disguised self-employment’ was initially tackled almost a decade ago by the
IR35 legislation but it’s generally reckoned that this is being bypassed
because of more widespread hiring of ‘controlling persons’ , so ministers are
considering tighter regulation. The aim now is therefore to ensure that where
an organisation hires a controlling person to perform a role, that organisation
(unless a private sector firm with fewer than 10 staff) will have to deduct
PAYE and NI at source, just as if the contractor were an employee.

Judging by the tone of today’s
Commons report, not to mention loads of anti-tax avoidance stories in this
morning’s newspapers, there is likely to be widespread political and popular support
for such a move. For example, the shadow chancellor Ed Balls spoke of cracking
down on ‘bogus self-employment’ when addressing the Labour Party conference at
the start of the week. However, those taking tough action must take care not to
undermine the important source of flexibility that ‘off payroll’ work provides both
to hiring organisations and the economy more generally.

The Treasury has yet to
calculate how much revenue a tightening of tax rules in this area might
generate, though it does conclude that there will be ‘no significant economic
impact’ and only ‘minimal impact’ on public service delivery, a conclusion I
find somewhat surprising.

It’s silly to portray off
payroll contractors as tax avoiding ‘fat cats’ who can afford to cough up extra
taxes without any side effects. Only a minority are the ‘top talent’ media
personalities that attract criticism, the majority are working long hours for comparatively
little financial reward. The most obvious possibility therefore is that if
required to pay higher tax and national insurance these contractors will simply
raise their fees. This will either dent any hoped for addition to the
government’s coffers or mean that public sector bodies will cut back on their
use of contractors, which will be bad news for those hoping to improve public
service delivery as well as contractors themselves. If private sector
organisations (which will also be covered by changes to tax rules) end up
having to cut back too, work will be left undone with no guarantee that more
employees will be hired on the employee payroll to compensate.

It’s perfectly
understandable that at a time of fiscal austerity, with either ‘we’re all in
this together’ or ‘One Nation’ essential mantras for politicians looking to
respond to popular sentiment, there is a policy imperative to ensure everyone
pays their fair share of tax. But it’s daft to go about improving tax
transparency in a way that could easily harm public sector reform, economic growth
and jobs. We may not need our politicians to be as ruthlessly efficient as
James Bond, but we don’t want them to act like Bond’s hapless comic opposite Johnny
English and shoot us all in the foot either.